Standard Motor Products Inc (SMP) 2011 Q3 法說會逐字稿

Good day, everyone and welcome to today's Standard Motor Products Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded. I will be standing by, if you should need any assistance.

It is now my pleasure to turn the conference over to Mr. Jim Burke. Please go ahead.

Okay, thank you. Good morning, and welcome to Standard Motor Products third quarter 2011 conference call. In attendance from the Company are Larry Sills, our Chief Executive Officer and myself, Jim Burke, Chief Financial Officer.

As a preliminary note, I would like to point out that some of the material we will be discussing today may include forward-looking statements, regarding our business and expected financial results. When we use words like anticipate, believe, estimate, or expect, these are generally forward-looking statements.

Although we believe that the expectations reflected in these forward-looking statements are reasonable, they are based on information currently available to us, and certain assumptions made by us and we cannot assure you that they will prove correct.

You should also read our filings with the Securities and Exchange Commission for a discussion of the risks and uncertainties that could cause our actual results to differ from our forward-looking statements.

I will review the financial highlights and then turn it over to Larry followed by Q&A.

We're very pleased with our Q3 performance. Consolidated net sales in the third quarter were $236.2 million, up $8.7 million or 3.8%. And for the nine months year-to-date, sales were $700.5 million, up $62.5 million or 9.8%. By segment, Engine Management net sales in Q3 were $165.2 million, up $11.6 million or 7.6%. Temperature Control net sales in Q3 were $68.1 million, down $3.6 million or 5.1%.

As we cautioned during the last investor conference call, Q3 2010 temp sales had increased 20.6% for two reasons. First, the hottest summer on record in a dozen or so years. And second, customer cautiousness early in the season led to late summer purchases.

In 2011, we experienced the opposite effect, as we offered spring promotion discounts, which led to earlier pre-season orders. The key takeaway on temp sales for 2011 is that we are ahead of 2010, one of the hottest summers on record, by 8.7% for the nine-month results.

The consolidated gross margin dollars in Q3 improved $4.5 million to 27.3%, up 0.9 points. By segment, Engine Management gross margin improved $4.1 million to 26.5%, up 0.6 points and our Temperature Control gross margin improved $200,000 to 25.4%, up 1.5 points. Both Engine Management and Temperature Control margins reflect savings from our key initiatives for low-cost sourcing, low-cost manufacturing and [make first buy] savings.

Consolidated SG&A expenses in Q3 were $41.7 million or 17.6% of net sales, favorable 0.9 points. We continue to gain leverage on SG&A expenses, as our sales have grown 9.8% year-to-date. On a year-to-date basis, SG&A expenses, excluding the $3.6 million post-retirement curtailment gain in Q2, were 18% versus 18.9% last year or 0.9 points favorable. Alternatively, while Q3 sales grew 3.8%, we reduced SG&A expenses in the quarter by $300,000 or 0.7%, and for the year-to-date sales grew 9.8%, we held the SG&A increase to less than half at 4.6% increase.

Consolidated operating profit improved to 9.6% of net sales in Q3 and 7.8% year-to-date, excluding the $3.6 million post-retirement curtailment gain. The net effect of our operational results, as discussed on our non-GAAP reconciliation, was diluted earnings per share of $0.59 versus $0.43 in Q3 and $1.39 versus $0.96 for the nine months year-to-date. We are very pleased having converted a Q3 3.8% sales increase into a 37% earnings per share improvement, and for the nine months year-to-date converting a 9.8% sales increase into a 45% earnings per share improvement.

Looking at the balance sheet, accounts receivable increased $32.5 million against December 10, but actually decreased $33.7 million against September 10 levels. Inventory decreased $7.2 million since December 10 and $11 million, excluding the $3.8 million inventory from the BLD acquisition earlier in the year. Inventories are about equal to September 10 levels, reflecting improved inventory turns on the 9.8% sales increase.

Goodwill and other intangibles increased $18.3 million since December 10, primarily related to the BLD acquisition. Other assets decreased $11 million since December 10, primarily related to a reduction of $9.4 million in deferred income taxes. The deferred tax reduction primarily relates to our post-retirement amendment, which was also the primary reason for the other liabilities reduction of $20.3 million.

Total debt at September 30, 2011 was $42.1 million, reflecting a reduction of $23.5 million since December 10, despite our $27 million expenditure for the BLD acquisition. On September 22, 2011 we successfully amended our bank facility with the following improvements. A 100 basis point borrowing rate reduction, one-year maturity date extension to March 2015, permitted acquisitions up to $50 million, and annual share buyback programs up to $5 million per year.

On the last two points, we have already implemented action plans. Acquisitions; last week we announced the acquisition of Forecast Trading Corp. for $44 million. Larry will discuss the benefits of this business.

On August 29, we announced the share buyback program for $5 million. Through yesterday, we have purchased roughly 320,000 shares at an average cost of $12.84 and have roughly $900,000 remaining availability against our $5 million authorization limit. Our revolver, as we currently stand after the Forecast acquisition and share buyback program, has roughly $80 million excess borrowing capacity.

Lastly, from our cash flow statement, CapEx spending in Q3 was $2.1 million and $6.7 million year-to-date, and depreciation and amortization in Q3 was $3.4 million and $10.4 million for the nine months.

With that, I'll turn it over to Larry Sills.

Okay. Thank you. Good morning, everybody. As Jim said, we are quite pleased with nine-month results. Sales are up roughly 10%. We're showing steady improvement in gross margin and SG&A and with major improvement in net profit. So all this was covered by Jim. So, let me talk a little bit about these two acquisitions and then we'll open for questions.

Okay. First was BLD, which we acquired earlier in the year. BLD is a manufacturer of several key engine management product groups. We brought from them. We were their biggest customer. And we accounted for about 40% of their total volume. The benefit obviously, this is vertical integration for us. We are now a basic manufacturer of these groups. We have moved many of these operations to Reynosa, Mexico, which will provide further cost savings. I happened to be there last week and everything is up and running smoothly. The 60% of the business to the third parties, we have maintained it. So in total, I believe this will prove to be quite a successful acquisition and as we said, this was accretive from year one.

The second, which we just announced, is Forecast Trading. Forecast is the leading supplier to Engine Management and what they refer to as value line or second line or economy line products. This has become a growing segment of the business caused somewhat by an aging vehicle population, cars are getting older and older, plus difficult economic times. So this is growing. Now, Forecast is the best in the industry at this segment and then for a long time they have developed low-cost engines around the world and they have an excellent reputation.

We're not going to be able to offer our customers an excellent combination with the best OE quality line and now the best value line, it's a good combination. We announced this to all of our customers last week. We're out here right now at the main industry trade show and we've been talking to people about it for the last several days and have heard nothing, but very, very positive comments. And financially, as we have said, this will be accretive to earnings from year one.

So, in total, two acquisitions in one year, which is a fair amount for us and the good news is, we've been able to finance them essentially from cash flow, which is an excellent model for the future. So to conclude, pleased with nine-month results, pleased with the two acquisitions, the industry remains healthy.

And with that, let us open for questions.

(Operator Instructions) We'll take our first question from the site of Aditya Oberoi with Goldman Sachs. Your line is open.

Hi, thanks a lot.

Hi, Adi.

So, congratulations on a good quarter. I just had a few questions, first a housekeeping one. Is the Forecast Trading Corporation acquisition already closed or is there -- or if it's not closed, what's the time period that you're thinking of closing it?

Yes, it's closed. Yes, we completed it on October 25.

Okay, great. And if you can give some directional sense of how are the gross margins of that business, are they in line with your Engine Management gross margins or do you think once you kind of bring in the efficiency, the margins will see uptick and reach your levels or if you can give some color on that?

Yes, the Forecast -- the volume on Forecast is in the approximately $30 million range. The earnings will be accretive. I think the other expenses (inaudible) the margins and that is similar enough to where Standard would be overall.

Got it. And on SG&A, you guys had a very strong performance this quarter. I think it's for the -- in the past 12 or 15 quarters, this is the first time SG&A was like at 17.6% kind of -- as a percentage of sales.

Going forward, I know next year, you're going to see a $6 million headwind in SG&A from the expiration of your Durbin Amendment. But if we can strip that out, do you think you guys can further work on your SG&A and bring that percentage even further down?

Two points there. Just -- you have to be careful with the percentage when we get into the Q4 now.

Absolutely.

For anybody that's on there we're doing any modeling because as our sales are much lower from the seasonal end of the business in Q4, the percent would increase. So, you have to evaluate annually.

And while we do have the one-time curtailment benefit gain that will go away, $3.6 million, and then there was another -- the amortization of the post-retirement, I think that's about another $2 million difference. Then we still strive for further SG&A savings. And again, the large driver there will be as we can -- if we gain incremental sales volume, we can convert that into a greater leverage.

Got it. That's helpful. And one question maybe for Larry. Like we've seen the average age of the car go up to like historic highs right now, it's like then and changed right now.

And have you seen any kind of change in the type of products that consumers are buying, maybe now it's more a DIY customer or do-it-myself kind of a customer, which typically buys probably a cheaper product, have you seen any kind of trend shifts on that line?

Yes. Yes. We have and there is this trend. As I said, it's probably -- we believe it's a function of the aging car population. So, you have a 13-year-old car, you're looking to economize, especially when times are tough. So, yes, we see a migration to value line products, which was our main reason for making the Forecast acquisition.

And we think this puts us in excellent shape for this trend. And again, these guys are really good at it and have developed low-cost sources around the world. So, yes, we do see that trend and this is how we are dealing with it.

Got it. So, maybe a follow-up question to that would be as you're going to switch to or as the business mix becomes more value line product, do you think it could have a small impact on margins, or do you think you guys can make the similar kind of margin levels on both kind of products, both like the premium category products and the value line product?

Well, we're still learning it, but I believe we will be able to maintain margins. We'll come close to it. Again, these folks -- yes, it's sold for a lower price, but it is also acquired at a lower price. So, we believe the margins are not going to vary all that much. So, it is our job to work on the cost end of it to make sure that that happens.

Great. Thanks a lot. And once again congratulations, guys.

Thank you.

Thank you.

We'll take our next question from the site of Greg Garner with Singular Research.

Thank you for taking my question. First of all, congratulations on a very nice quarter. Question is about the gross margin in Temperature Control, it was greater in Q3 even as revenues -- relative to Q2 even as revenues were declining. So, is it -- just to understand that, is this has to do with mix or is it just pricing situation with no discounting?

Yes. Greg, our pricing is basically [in for] on a full season basis, that will be in there. And the benefits that we're getting from the margin improvement and there is really just the Mexico, the low-cost sourcing in there and the production volumes with the absorption that we're getting.

Earlier in the year, we wind up incurring variances that would be a carry-over from the prior quarter, the fourth quarter. So, the margins tend to be a little bit lower in the beginning. What you're seeing now in Q3 reflects really the higher production volumes that we would have had in the second quarter and part of the third quarter. It's kind of a timing difference. You got to be very careful even with sales and with margins on Temperature Control to try and look at on a nine-month or even a full-year basis.

Okay. And onto the Forecast Trading acquisition, is this the same distribution channels that you'll be using or are there different distribution channels versus the value line?

No, it's essentially the same. The same customer base as we have for the rest of our business.

Okay. And are there manufacturing synergies or is it going to be the movement of factories to operations to Mexico similar to prior acquisitions?

Again, we've only had this company for a few days, but what we're going to do is go through a careful part number by part number analysis and look for cost. And we will be making those determinations at that time.

I think just to clarify on that, Greg, they do 100% sourcing, so they're virtually in a single location area in Fort Lauderdale. So, there is no significant factories that are closing down or anything cost like that.

So, what we're doing is we'll get the benefits of the different vendors are increasing our manufacturing, but there isn't something that we're looking at like BLD or something or Dana if you went far back to where there's significant cost involved here.

Okay. So in another words, they source in low-cost manufacturing facilities already in the world.

That's what they do. Yes, that's correct.

Okay.

So, we'll be comparing that with our -- when we buy it and we'll also be comparing it with where we make it. And hopefully, we will take the better of the two.

Okay. And just couple of maintenance questions, I didn't hear what the CapEx was for the quarter. Could you tell me that again, Jim?

CapEx for the quarter was $2.1 million and $6.7 million year-to-date.

And on the share buyback, you mentioned there was -- did I get this right, I just want to verify this, 325,000 shares are already purchased since the August announcements?

Yes, it was -- hold on one second -- it was about 320,000 shares roughly purchased.

Okay.

Okay. And about $4.1 million, so we have about $900,000 remaining open on that authorization.

Okay. All right, very good. Thank you.

All right. You're welcome, Greg.

(Operator Instructions) We'll go next to the site of Adam Brooks with Sidoti & Company.

Yes, good morning, guys. Just wanted to go back to what you were saying about Temperature Control and the gross margin, is that -- kind of imply that there is a little bit of a lag maybe from [when volumes had to] there being a benefit to the margin. So, I think there's one of my personal interests, obviously revenue down from 2Q, but gross margin up. So, can you say there is a lag or is it just very tough from quarter to quarter to just look at that or it should be looked at on an annual basis?

You really have to look at it on an annual basis. But I just -- offering some color there that, if you look at the fourth quarter on a normal fourth quarter when sales are down and if we're -- it depends on really what's happening with our inventory levels. But if we're pairing back inventory levels, production volumes will be down, so you won't have as much as a favorable benefit of absorption versus what you're doing with in the second quarter.

So, it tends to have more lower positive variances come into the first quarter. But the best way to look at it, Adam, is you really have to look at it overall what we said on Temperature Control for long term or our focus is margins in the 23% to 24% range.

We're basically at the lower end of that range, if you evaluate it on a full-year basis. And we continue to work on that to improve it further and hopefully at some point, I'll feel comfortable enough where we may even be able to say we can raise that level, but it's a very competitive product line.

And can you give us a sense, I know you've thrown out the targets for 2011, maybe where you think you are, what inning as far as shifting manufacturing to the low-cost countries, I guess, to Poland and Mexico and maybe if there's anything more you can do? I guess kind of your sense as to how far along we are in that process?

Okay. Well, we currently manufacture somewhat more than half of our total manufacturing in Mexico and Poland. I think we've taken a lot of the low-hanging fruit. However, there is more to do. So, we are anticipating further moves in the next year or two.

Okay. And just maybe a little bit of commentary on what you're hearing from customers, anybody looking to pair back inventories being nervous, maybe comparing this to how you were or what you were hearing in '08, '09?

Well, again, we're out here, we're talking to everybody and I'm hearing very positive feedback.

All right, great. Thank you.

And it looks like we have no further questions at this time.

Okay, very good. All right. I'd like to thank everyone for joining our conference call today. Goodbye.

This concludes today's conference. You may disconnect at any time and have a wonderful day.